Trade

Lane Kenworthy, The Good SocietySeptember 2016

Trade is the buying and selling of goods and services across national borders. Exports are goods and services produced in the United States and purchased in some other nation; imports are produced outside the US and purchased here. Trade is one aspect of globalization, which also includes cross-border movement of people (migration), money (foreign investment), jobs (outsourcing), and culture, along with supranational decision making (United Nations, World Trade Organization, International Court of Justice).

Most economic analysts believe trade contributes to economic efficiency and therefore faster economic growth. One recent estimate suggests that about 10% of worldwide economic growth since the early 1990s owes to trade.1

Trade between poor nations and rich ones can help the incomes of people in poor countries grow faster. If producers in poor countries are able to sell their goods and services in rich countries, the size of the market expands enormously. There are more customers and those customers are, on average, able to pay more than customers in the poor country. This enables increased production in the poor country, which usually leads to more jobs and rising wages. Virtually every successful economic development story of the past half century — including South Korea, Taiwan, Hong Kong, Singapore, China, Brazil, Botswana, and Mauritius — has relied heavily on exports to rich countries.2

This matters a great deal, because much of the world’s population is poorer than even the least well-off in the United States. Figure 1 offers one way to see this. It shows that the income of the poorest 5% of Americans (ventile 1 on the horizontal axis) situates them at the 68th percentile of the world’s income distribution, meaning their average income is higher than that of two-thirds of the world’s population. In Brazil, a person in the middle of the distribution (10 on the horizontal axis) has an income similar to Americans at the bottom. In China and even more so in India, the bulk of the population is less well-off than the lowest-income Americans. Between 2000 and 2012, China’s share of world manufacturing exports increased from 5% to 17%, and during that decade more than 200 million Chinese moved up into the global middle class.3

Figure 1. Household incomes in the US and three poorer countriesSource: Branko Milanovic, The Haves and the Have-Nots, Basic Books, 2011, figure 3. Each “ventile” is 5% of the population in a country. Ventile 1 is the poorest 5%; ventile 20 is the richest 5%.

In theory, trade between a poor nation and a rich one is beneficial not only for people in the poor country but also for those in the rich one. Imports give people in the rich country more choice of goods and services to buy. Imported goods and services also typically come at a lower price, because wages in the poor country are lower than in the rich country. As of 2013, for instance, total compensation for a manufacturing employee averaged $7 per hour in Mexico, compared to $36 in the United States.4

At the same time, imports can hurt workers in rich nations. When Americans purchase imported goods or services instead of ones produced in the United States, that may reduce jobs and/or wages for some American workers — especially the less-skilled, whose labor is more easily replicated in poor countries.

Between 2000 and 2012, imports from China jumped from 1% of America’s GDP to nearly 3%.5 That’s a large increase in a fairly short span of time. David Autor and colleagues find that this increase in imports from China may have cost Americans 2.4 million jobs.6 Another estimate puts the figure at 3.2 million.7 In principle those workers could have shifted to other jobs, but in practice that can be difficult unless the displaced worker is willing to accept significantly lower pay and/or move to another city or state. Trade with poorer nations probably also reduces Americans’ wages.

Some workers who have lost a job or experienced a drop in wages receive unemployment compensation, trade adjustment assistance, or other government benefits, but those transfer benefits haven’t been nearly sufficient to offset the loss.8

Trade with low-wage countries periodically flares up as a key issue in American politics, especially during presidential elections. Candidates for the presidency often promise to pursue a “tougher” trade policy, by which they mean reducing imports from poor countries in order to save more Americans’ jobs.

Would it be a good thing if the United States imported fewer goods and services from Mexico, China, India, and other developing nations?

AMERICA’S TRADE POLICY AND IMPORTS

Let’s begin by looking at how US trade policy has changed over time and how it compares with that of other affluent countries. Policies to reduce imports include tariffs (taxes on imposes), quotas, restrictions, and regulations. Figures 2 and 3 show two measures that combine these various policies, one available since 1995 and the other only since 2011. They suggest that America’s trade policy openness is similar to that of most other rich nations, and that it’s gotten somewhat more open in recent decades, but not dramatically so.

Figure 2. Trade freedomScored on a scale of 0 to 100, with higher scores indicating greater freedom. The score is based on a country’s average tariff rate and the extensiveness of non-tariff barriers to imports. Data source: Heritage Foundation, heritage.org/index.

Figure 4 shows imports as a share of gross domestic product (GDP), going back to 1970. The US has tended to import less than most other affluent nations. That isn’t because we’ve had a more protectionist policy approach to trade (see figures 2 and 3). It owes mainly to our large size, which means there are plenty of domestic producers in most product markets, and to the fact that it costs more to transport goods from Europe to the United States than from one country within Europe to another.

While the level of imports varies widely across these countries, figure 4 shows considerable similarity in the trend over time. In most of them we observe a steady increase since 1970.

So the United States doesn’t have a policy approach to trade that is notably more open than that of other rich countries. Nor do we import more; on the contrary, we import less. And despite the rise in imports from China since 2000, America hasn’t experienced an unusually large surge in imports overall, neither compared to the past generation as a whole nor relative to other affluent nations.

IMPORTS AND EMPLOYMENT

Next, let’s consider employment. Although service jobs are increasingly vulnerable to replacement abroad, the concern among the American public and policy makers is mainly about jobs in manufacturing. Figure 5 shows manufacturing employment as a share of the working-age population since 1970. The break in the lines is due to a change in measurement. In both periods, 1970-99 and 2000-15, US manufacturing employment declined steadily, at about the same pace as in most other rich countries.

Figure 5. Manufacturing employmentShare of the population aged 15-64. The break in the data series is due to a change in measurement. Data source: OECD, stats.oecd.org and data.oecd.org. “Asl” is Australia; “Aus” is Austria.

Figure 6 shows the over-time patterns another way. It shows the average per-year change (decrease) in manufacturing employment in the two periods. The countries are ordered by their change over the full period from 1970 to 2015. The United States is in the middle of the pack. Its employment rate in manufacturing declined, on average, by about one-fifth of one percent each year — more than in some countries such as South Korea and Japan, but much less than in others, such as Ireland, Sweden, the UK, and France.

Here too we see no indication of a sharp acceleration in the damage around the year 2000. Employment loss in manufacturing was only slightly more rapid from 2000 to 2015 than it had been from 1970 to 1999.

Figure 6. Change in manufacturing employmentChange per year in manufacturing employment as a share of the population aged 15-64. The countries are ordered by change over the entire period, from smallest decrease (Korea) to largest (Ireland). Data source: OECD, stats.oecd.org and data.oecd.org. “Asl” is Australia; “Aus” is Austria.

Could the United States significantly alter the downward trend in manufacturing employment? The fact that this trend has been ongoing for half a century, and that it has occurred in all rich countries, suggests grounds for skepticism. According to Dani Rodrik, “there is virtually nothing you can do with trade policy … that is going to bring substantial manufacturing employment back to the U.S.”9

What about Germany in the period since 2000? Figures 5 and 6 show that manufacturing employment in Germany has decreased only slightly during these years, less than in any other rich nation. Was this because Germany imposed tariffs or limits on Chinese imports, or kept its currency (the euro) low relative to China’s? No. Three things account for Germany’s apparent success. First, the new manufacturing employment data series begins only in 2005 for Germany, so the data in figures 5 and 6 don’t include the period from 2000 to 2004, when manufacturing employment fell in nearly all other nations. Second, Germany’s manufacturing sector has some distinct, idiosyncratic advantages — the apprenticeship system, a dense layer of middle-sized manufacturing supplier firms, and large successful exporters with considerable brand recognition.10 Third, Germany’s success in retaining manufacturing jobs during and after the 2008-09 economic crisis was only partly about manufacturing itself. Germany’s comparatively strong employment performance during these years was even stronger in services than in manufacturing, which suggests that its trade rules and practices may have played little role in its success relative to other rich nations.11

Developments in the United States since 2009 might offer an additional clue about the prospects for a resurgence of manufacturing jobs. China has become less attractive as a site for manufacturing, due to an increase in transportation costs caused by rising oil prices (prior to 2015), an increase in Chinese wages, and an increase in the value of China’s currency.12 Since 2009, US manufacturing output has increased by about 20%, as some factories have moved back from China, other new ones have opened, and existing ones have increased production. Yet manufacturing employment in the US has increased by only 5%, because most of the new factories are heavily automated.13

IMPORTS AND WAGES

Imports threaten not only Americans’ jobs but also wages. When employers are able to shift production abroad to a lower-wage country, they can use this as a threat in negotiating pay with existing employees. That creates downward pressure on the wages of many workers in manufacturing and some in services.

For American workers on the middle and lower rungs of the wage ladder, wages (adjusted for inflation) have been essentially stagnant since the late 1970s, as figure 7 shows. Imports, which increased steadily during this period (figure 4), almost certainly have contributed to this wage stagnation. But changes to many other institutions and policies also contributed, including greater use of computers and robots, the shareholder value revolution in corporate governance, heightened competition in domestic product markets, union decline, rising immigration, and stagnation in the federal minimum wage.14

Figure 7. WagesHourly wage at the fiftieth (median) and tenth percentiles of the wage distribution. 2012 dollars; inflation adjustment is via the CPI-U-RS. Data source: Economic Policy Institute, “Wages Deciles,” The State of Working America, using Current Population Survey (CPS) data.

So how much of the wage standstill is due to imports? Imports as a share of US GDP increased faster in the 1970s than in the 1980s or 1990s, yet wages rose in the 1970s, were stagnant in the 1980s and the first half of the 1990s, and then rose rapidly in the late 1990s.15 This suggests imports’ effect on wage trends probably was fairly small. The surge in imports from China in the early 2000s may have had a larger impact. David Autor and colleagues estimate that it reduced wages for Americans by an average of $213 per year.16

IMPORTS AND AMERICANS’ OVERALL ECONOMIC WELL-BEING

Standard economic theory predicts that, overall, trade will enhance the financial well-being of people in not only poor exporting countries but also rich importing ones. That is, even taking into account the loss of income experienced by individuals who lose their job or have their wages reduced, the importing nation’s population as a whole will benefit, due to the lower prices they pay for goods and services coupled with greater efficiency in the economy and a resulting increase in overall employment.

What does the evidence tell us about whether this has in fact been the case for the United States? We have a variety of estimates.

Pablo Fajgelbaum and Amit Khandelwal estimate that the average gain from trade for Americans is equivalent to 8% of income. They also find that the gain is larger for households with lower income, who tend to spend a much larger portion of their income on goods that are made more cheaply abroad and therefore cost less than if made in the US.17

Lorenzo Caliendo and colleagues estimate that in the immediate aftermath of a large trade shock such as the increase in Chinese imports the US experienced after 2000, the net benefits of trade to Americans may be close to zero. Once workers are able to move to new localities and regions in order to get back into employment, the net benefits become positive and sizeable.18

The US International Trade Commission estimates that, as of 2013, eliminating the (relatively few) trade restrictions we have in place would boost Americans’ welfare by about 0.02% of GDP.19

A 2012 survey of 50 academic economists by the University of Chicago’s Booth School of Business found that 96% of those responding agreed with the statement “Some Americans who work in the production of competing goods, such as clothing and furniture, are made worse off by trade with China.” Yet 100% agreed that “Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China.” Similarly, 98% agreed that “On average, citizens of the US have been better off with the North American Free Trade Agreement than they would have been if the trade rules for the US, Canada, and Mexico prior to NAFTA had remained in place.” And 96% agreed that “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”20

So according to the best available estimates, and the consensus among experts, trade is a net positive for Americans’ living standards.

WHAT DO AMERICANS THINK?

Survey organizations such as Gallup, Pew, and the General Social Survey began regularly asking Americans about their views on trade and trade policy in the early 1990s. What the survey responses suggest is that Americans are divided about the effect of imports and about what our trade policy should be. As figures 8 through 11 show, between a third and half of American adults say they think the impact of foreign trade and free trade agreements has been bad for the US, and between half and two-thirds believe we should limit imports.

Figure 8. Foreign trade is more a threat than an opportunityEstimated share of US adults. Question: “What do you think foreign trade means for America? Do you see foreign trade more as — an opportunity for economic growth through increased US exports or a threat to the economy from foreign imports?” Response options: opportunity, threat, both, neither, no opinion. The chart shows the share responding threat, with both, neither, and no opinion responses excluded. Data source: Justin McCarthy, “Americans Remain Upbeat About Foreign Trade,” Gallup, 2016.

Figure 9. Free trade agreements have been badEstimated share of US adults. Question 1: “In general, do you think that free trade agreements like NAFTA and the policies of the World Trade Organization have been a good thing or a bad thing for the United States?” Question 2: “In general, do you think that free trade agreements between the US and other countries have been a good thing or a bad thing for the United States?” Response options for questions 1 and 2: good thing, bad thing, don’t know. The chart shows the share responding bad thing, with don’t know responses excluded. Question 3: “Do you think free trade agreements have definitely helped, probably helped, probably hurt, or definitely hurt the financial situation of you and your family?” Response options for question 3: definitely helped, probably helped, neither/doesn’t affect me, probably hurt, definitely hurt, don’t know. The chart shows the share responding probably hurt or definitely hurt, with don’t know responses excluded. Data source: Pew Research Center, “Free Trade Agreements Seen as Good for US, But Concerns Persist,” 2015.

Figure 10. Free trade agreements are bad for jobs and wagesEstimated share of US adults. Jobs question: “Do free trade agreements create jobs in the US, lead to job losses, or not make a difference?” Response options: create jobs, not make a difference, lead to job losses, mixed/it depends, don’t know. The chart shows the share responding lead to job losses, with mixed/it depends and don’t know responses excluded. Wages question: “Do free trade agreements make the wages of American workers higher, lower, or not make a difference?” Response options: higher, not make a difference, lower, mixed/it depends, don’t know. The chart shows the share responding lower, with mixed/it depends and don’t know responses excluded. Data source: Pew Research Center, “Free Trade Agreements Seen as Good for US, But Concerns Persist,” 2015.

Figure 11. America should limit importsEstimated share of US adults. NYT-CBS question: “Which of the following statements comes closer to your opinion: (1) trade restrictions are necessary to protect domestic industries, or (2) free trade must be allowed, even if domestic industries are hurt by foreign competition?” Response options: trade restrictions are necessary, free trade must be allowed, don’t know. The chart shows the share responding trade restrictions are necessary, with don’t know responses excluded. Data source: New York Times. GSS question: “How much do you agree or disagree with the following statement: America should limit the import of foreign products in order to protect its national economy.” Response options: agree strongly, agree, neither agree nor disagree, disagree, disagree strongly. The chart shows the share responding agree strongly or agree. Data source: General Social Survey, SDA Archive, series imports.

One recent study found that, in an experimental setting, Americans were more likely to prefer an outcome of trade in which one American is better off but 1,000 people from the trading partner country are worse off rather than an outcome in which one American is worse off while 1,000 people in the other nation are better off.21

This skepticism toward trade and imports on the part of a significant share of Americans may help account for some of the dynamics of the 2016 Republican and Democratic presidential primaries. Donald Trump and Bernie Sanders argued for a more restrictive trade policy. Sanders favored “reversing trade policies like NAFTA, CAFTA, and PNTR [permanent normal trade relations] with China.” His aim: “If corporate America wants us to buy their products, they need to manufacture those products in this country, not in China or other low-wage countries.”22 Trump threatened to put a 45% tax (tariff) on Chinese imports and a 35% tax on Mexican imports “if they don’t behave.”23 Trump and Sanders consistently drew very large crowds at their speaking events, and they were among the top three vote-getters (along with Hillary Clinton).

POLICY OPTIONS

Like technological advance and trade within nations, international trade tends to increase overall economic well-being but to impose a cost on some people in the form of lost jobs and/or lower wages.

The appropriate policy response to technological progress and to trade within the United States isn’t to block it or limit it. Instead, it’s to provide the people harmed with some compensation and help in adapting. Helpful cushions and supports include unemployment insurance, portable pensions and health insurance, schooling, retraining, job placement assistance, wage insurance, infrastructure improvement for hard-hit communities, and a higher minimum wage and Earned Income Tax Credit.

The argument in favor of this approach is even stronger when it comes to international trade. If we restrict technological advance, cross-state trade, or international trade, Americans suffer as consumers. For international trade, there is an additional victim: the workers in poor countries who lose out on the jobs and higher wages that international trade generates. Many of these people have living standards far below those of the United States (figure 1), which means the net benefits from trade are that much greater. In the words of David Autor, “The gains to the people who benefited are so enormous — they were destitute, and now they were brought into the global middle class. The fact that there are adverse consequences in the United States should be taken seriously, but it doesn’t tilt the balance.”24 This line of reasoning favors an approach put succinctly by Joseph Stiglitz in his book Making Globalization Work: “Rich countries should simply open up their markets to poorer ones, without reciprocity and without economic or political conditionality.”25

(This doesn’t imply support for any and all “free trade agreements.” Such pacts may be stuffed with provisions protecting particular rich-world firms or industries to a degree that, on net, the agreement will hurt rather than help poor nations.26)

A skeptic might ask why the same conclusion doesn’t apply to migration of people from poor countries to rich ones. For it, too, there are clear net welfare gains, because living standards for immigrants increase much more than they decrease for members of the native-born population who lose their job or see their wages fall. So why shouldn’t a country like the United States let in as many immigrants as want to come? The answer is that a very large flood of immigrants might pose too great a challenge for local economies and governmental agencies to handle. The evidence suggests that isn’t the case with trade. Even the China shock during the first decade of this century turned out to be manageable.

But why not use just a little protectionism to limit imports in certain sectors, or in certain vulnerable parts of the country? The free trade position has three responses.

First, some barriers to imports aren’t too objectionable. Indeed, the United States still has some in place today, and the losses to well-being here and abroad probably aren’t massive. But by the same token, advocates of small-bore protectionism ought to acknowledge that this strategy isn’t likely to do much to slow the decline of manufacturing employment in the United States, nor to get wages for workers in the bottom half rising again.

Second, in the present US context, arguing for tougher trade policy or against free trade agreements may be an unwise use of political capital. The cushions and supports needed to help Americans harmed by international trade are also needed to aid the victims of technological change and of within-country trade, and they are underdeveloped in the US — inadequate in coverage, funding, and coordination. Part of the reason these programs are inadequate is that debate about trade tends to get stuck on the question of whether or not to limit imports. Three groups have an interest in framing the debate in these terms: Republicans who find it helpful to argue that Democrats are protectionist and thereby against Americans’ interests as consumers,27 lobbyists for firms that stand to benefit from import restrictions, and workers in manufacturing and offshorable services. Even when the proposed restrictions are relatively minor — minimal labor and/or environmental standards, for instance — once this door is opened, it almost inevitably takes center stage in the debate. Far less attention, if any, gets devoted to the adjustment and cushioning side. As a result, the political constituency and momentum for cushions and supports tend to be far smaller than they could be.28

Third, there is a symbolic consideration. America has, arguably, been at its best when we’ve embraced globalization and sought to improve the well-being of people in other countries. Think of World Wars 1 and 2, the Marshall Plan, opposition to communist expansion, the Peace Corps, US leadership in creating and supporting international organizations and procedures (the UN, the IMF, the World Bank, Bretton Woods, GATT). The United States is among the richest societies in human history. We do have economic problems, including stagnant wages for half or more of the workforce and limited employment opportunity for some. But choosing to address these challenges by restricting access to our markets, at the expense of the world’s poorest, sends a message that may not be worth the relatively small gain.

Robert C. Feenstra, “Integration of Trade and Disintegration of Production in the Global Economy,” Journal of Economic Perspectives, 1998; Edward Leamer, “What’s the Use of Factor Contents?,” Journal of International Economics, 2000.↩

For Democrats in particular, it might not be harmful politically to shift toward a position that forgoes limits on imports. Democrats could then ask voters whether they prefer globalization and technological advance with less government help (the usual Republican position) or with more.↩